Let the Comp Wars Begin

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Today is the deadline for sending comments to the Securities and Exchange Commission on its plan to revamp the reporting of executive compensation. Expect some heated horse-trading to start tomorrow and last until the commission’s final decision on the new rules expected later this year.

The wrangling is likely to be a good deal more intense than it was in 1992, the last time the SEC stepped up the disclosures of executive pay and perks. Among the most hotly debated provisions this time around are the threshold for reporting executive perquisites, Sarbanes-Oxley signoffs by CFOs and their bosses, and especially the so-called “Katie Couric” provision involving disclosure of the high pay of glitzy non-executives.

The reason to expect a struggle is that advocates and opponents seem equally strong. “The SEC will not be having as easy a time in reconciling the proposal as it did in 1992, [when there was] more universal agreement of what was and should be disclosed,” says Paul Hodgson, a senior research associate with The Corporate Library.

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On one hand, the supporters of greater disclosure are far more vocal now. “The situation today is such that the amount of support for proper disclosure of executive comp is spread much wider than in the past and has greater support from within corporations themselves,” Hodgson says. At the same time, “the supporters of limiting that disclosure are also vocal.”

A particular flashpoint, especially for media companies and investment houses, is the SEC’s proposal that companies should reveal the pay of their highest earning, non-management stars. The provision would require disclosure for up to three such employees whose total compensation for the last fiscal year was greater than that of any of the executive officers named in the proxy. At CBS, for instance, Couric will be paid about $15 million a year — a figure that could land her in the highest echelons of earners at the network, according to The Wall Street Journal.

Under the commission’s proposal, the names of such high rollers wouldn’t have to be revealed. That fact, however, hasn’t been enough to deter the provision’s critics from vigorous opposition. In a March 16 comment letter posted on the commission’s website, Jim Markey, vice president and chief securities counsel of the Kellogg Company, recommended that the SEC erase the provision.

Even though companies wouldn’t be required to disclose the names of the high-earning employees, “the disclosure of their job descriptions will normally make it easy for other employees and competitors to identify these employees anyways,” wrote Markey. Besides, he added, “the disclosure of the total compensation paid to a non-executive employee, such as a salesperson, could cause employee morale issues and provide our competitors with sensitive information that could be used to solicit the employment of our salespeople at the expense of Kellogg Company and its shareholders.”

One part of Markey’s case against the disclosures is the cost to the cereal maker and other similarly large companies. The provision would force them “to have to track the compensation of tens of thousands of employees across several countries just for purposes of the proxy statement,” he contends. Since high earning, non-executive types also wouldn’t have a policy-making function at Kellogg, “their compensation is likely not material to the company or a reasonable investor,” the lawyer added.

Kellogg’s position might well have held sway once the dust settles. “The proposal does look a little like one that was thrown in there,” says Hodgson, and it would be an easy point on which the commission could concede if it had to. Still the governance researcher hopes it will remain in the final rule “because stockholders have a right to know how that money is being spent.”

The SEC’s proposed $10,000 threshold for the disclosure of executive perks is likely to have more staying power. Currently, corporations must disclose officers’ perquisites only if they amount to the lesser of over $50,000 or 10 percent of the executive’s yearly salary and bonus.

Indeed, a fair number of commentators argue that the amount of every perk, no matter how small, should be disclosed. Martha Carter, a senior vice president for Institutional Shareholder Services, asserted that “having a $10,000 minimum threshold would allow companies to continue to avoid disclosure of many executive perquisites.”

Frequently, the small monetary value of certain perks gives the lie to their importance. “Inappropriate perquisites, even in small dollar amounts, may portend larger compensation problems,” she contended in a March 28 comment letter.

The pros and cons are sure to duke it out, however, on the matter of whether the top executive and the finance chief of a company should be required to sign off on the executive pay reported in proxies as they do now for company financials under the Sarbanes-Oxley Act. Noting that the SEC unsuccessfully proposed such signoffs in 1992, Hodgson said the SEC’s language “seems firm on those points, and they’re not likely to give it up.”

But the opposition here is likely be strong, arguing that top management shouldn’t be able to certify what board compensation committees actually control. Kellogg’s Markey argues that it’s inappropriate for company employees “to have to attest to the accuracy of [a] report that primarily involves the deliberations of an independent committee of the board of directors.” Instead, he contended, each member of the compensation committee should sign off on the new compensation analysis and discussion section that’s also being proposed by the SEC.